Treasuries rise as looming spending cuts spur demand for safety

Treasuries rose for the first time in three days amid speculation the start of $85 billion in automatic federal spending reductions tomorrow will choke off the recovery in the world’s biggest economy.

Bonds pared gains after a U.S. business barometer unexpectedly rose. Treasuries advanced earlier as revised data showed U.S. gross domestic product grew less than forecast in the fourth quarter. Benchmark 10-year notes rose for the first month since November as the prospect of fiscal cuts that harm growth, known as sequestration, boosted the case for the Federal Reserve to maintain asset purchases.

“It’s pretty well baked into the cake that no action is likely to be taken on the sequestration tomorrow,” said Thomas Simons, a government debt economist in New York at Jefferies Group Inc., one of 21 primary dealers that trade with the Fed. “GDP was weaker than expected. It’s nice to see the negative sign go away, but it’s still pretty weak.”

The U.S. 10-year yield dropped two basis points, or 0.02 percentage point, to 1.88% at 11:09 a.m. in New York, according to Bloomberg Bond Trader prices. The 2% note due in February 2023 rose 5/32, or $1.56 per $1,000 face amount, to 101 1/32. The yield fell to 1.84% on Feb. 26, the lowest level since Jan. 24.

Thirty-year bond yields declined one basis point to 3.09%.

Yield Curve

The difference between the yields on two-year and 10-year notes, called the yield curve, narrowed to 1.64 percentage points, approaching the 1.63 percentage-point level reached Feb. 25, the smallest on a closing basis since Jan. 24. It dropped from a 2013 high of 1.76 percentage points reached on Feb. 19.

Treasuries have returned 0.5% this month as of yesterday, after losing 1% in January, according to Bank of America Merrill Lynch indexes. They have declined 0.4% this year. German bonds gained 1.3% in February.

The 10-year term premium, a model that includes expectations for interest rates, growth and inflation, reached negative 0.72%, almost the most costly since Jan. 23. A negative reading indicates investors are willing to accept yields below what’s considered fair value.

The U.S. central bank is buying $85 billion of Treasury and mortgage-backed securities each month in an effort to spur the economy and cut a jobless rate that was 7.9% in January.

“The Fed will continue to deliver quantitative easing and the most important risk is that they could even extend,” said Patrick Jacq, a senior fixed-income strategist BNP Paribas SA in Paris. “Once there is evidence fiscal policy is weighing on growth, then the Fed probably will have to remain very dovish. The risk of yields pushing higher is very limited.”